A Quarterly Econometric Model for Short-Term Forecasting of the U.S. Dairy Industry (TB-1932, January 2012). This research evaluates the econometric approaches employed by USDA’s Economic Research Service (ERS) to contribute to the dairy sector forecasts published in the monthly World Agricultural Supply and Demand Estimates (WASDE) report. To generate the estimates, a quarterly model of the U.S. dairy industry is specified using data for fourth-quarter 1998 (Q4/1998) to first quarter 2009 (Q1/2009), and the model is estimated and validated employing data for Q2/2009 to Q1/2010. Different forecasts are generated using a variety of single equation and system methods, which are then evaluated in terms of forecast precision or predicting turning points in the data. Different approaches, however, more effectively forecast different variables. Vector autoregression with exogenous variables outperforms structural regression models for forecasting prices, but single and system estimations of structural models are superior to time series models for forecasting some items in farm supply and commodity balance sheets.

Carbon Prices and the Adoption of Methane Digesters on Dairy and Hog Farms (EB-16, February 2011). Biogas recovery systems collect methane from manure and burn it to generate electricity or heat. Burning methane reduces its global warming potential, thereby reducing greenhouse gas (GHG) emissions. Climate change mitigation policies that effectively put a price on GHG emissions could allow livestock producers to “sell” these reductions to other greenhouse gas emitters who face emissions caps or who voluntarily wish to offset their own emissions. Depending on the direction and scope of future climate change legislation, income from carbon offset sales could make methane digesters profitable for many livestock producers. By modeling the main determinants of producers’ decisions to adopt biogas recovery systems, we illustrate how the price of carbon influences this decision and the potential supply of carbon offsets from the livestock sector. For full report, see Climate Change Policy and the Adoption of Methane Digesters on Livestock Operations (ERR-111, February 2011).

An Analysis of U.S. Household Dairy Demand (TB-1928, December 2010). This report examines retail purchase data for 12 dairy products and margarine from the Nielsen 2007 Homescan retail data. Selected demographic and socioeconomic variables included in the Nielsen data are analyzed for their effects on aggregate demand and expenditure elasticities for the selected products. A censored demand system is used to derive the demand elasticities. The resulting estimates revealed that the magnitudes of 10 of the 13 own-price elasticities are greater than 1; substitute relationships are found among most dairy categories; expenditure elasticities are 1 or greater for 7 of the 13 products; and demographic and socioeconomic variables are statistically significant contributors to dairy demand.

Long-Term Growth in U.S. Cheese Consumption May Slow (LDPM-193-01, August 2010). Cheese production and markets have emerged as important dairy industry elements over the past three decades. Supply-and-use analysis shows an upward trend in total cheese consumption over the past three decades. Nielsen 2005 retail Homescan data were used to analyze cheese consumption by location, as well as by income, age, and racial/ethnic groups. Own-price and expenditure demand elasticities were also calculated using the Nielsen data. To the extent that increases in consumer food expenditure translate into more cheese purchases, it is expected that total cheese consumption will continue to rise. However, changes in the demographic profile of the U.S. population may somewhat slow future growth.

Organic Dairy Sector Evolves To Meet Changing Demand (Amber Waves, March 01, 2010). Declining demand for organic products in response to the economic downturn has slowed the rapid growth in organic milk production. Economic forces, primarily lower production costs, may be pushing organic dairies to be more like conventional dairies in terms of size, location, and the types of technologies used. More specific pasture requirements for organic certification proposed under USDA’s National Organic Program may affect how the organic milk production sector evolves.

Characteristics, Costs, and Issues for Organic Dairy Farming (ERR-82, November 2009) uses 2005 ARMS data for U.S. dairy operations, which include a targeted sample of organic milk producers, to examine the structure, costs, and challenges of organic milk production. Findings suggest that economic forces have made organic operations more like conventional operations and that the future structure of the industry may depend on the interpretation and implementation of new organic pasture rules.

Grain Prices Impact Entire Livestock Production Cycle (Amber Waves, March 2009). Between 2006 and 2008, feed costs nearly doubled and are expected to result in lower meat and dairy production in 2009. Feed prices have declined since mid-2008 and are expected to be lower in 2009, but the biological timeline of livestock production means meat producers are limited in what they can do in the short run to change production. Changes in the U.S. livestock industry structure and the use of alternative feeds, such as byproducts from ethanol production, will help reduce the impact of higher input costs on livestock producers.

Low Costs Drive Production to Large Dairy Farms (Amber Waves, September 2007) reports that average production costs per hundredweight (cwt) of milk produced fall sharply with herd size. Large dairy farms earn substantial profits, while most smaller operations experience economic losses. Given the cost advantages, the shift of dairy production to large farms contributes to rising industry productivity and lower real dairy prices. For the full report, see Profits, Costs, and the Changing Structure of Dairy Farming (ERR-47, September 2007).

Retail and Consumer Aspects of the Organic Milk Market (LDPM-155-01, May 2007) analyzes retail scanner data from 2004 and finds that most purchasers of organic milk are White, high income, and well educated. Consumer interest in organic milk has burgeoned, resulting in rapid growth in retail sales of organic milk. Most organic milk is sold in supermarkets, and organic price premiums are large and vary by region.

The Impact of Big-Box Stores on Retail Food Prices and the Consumer Price Index (ERR-33, December 2006) focuses on retail food- market dynamics and how they affect food price variation across store formats. The differences in prices across store formats are especially noteworthy when compared with standard measures of food price inflation over time. Over the past 20 years, annual food price changes, as measured by the CPI, have averaged just 3 percent per year, while food prices for similar products can vary by more than 10 percent across store formats at any point in time. Since the current CPI for food does not fully take into account the lower price option of nontraditional retailers, a gap exists between price changes as measured using scanner data versus the CPI estimate, even for the relatively low food-inflation period of 1998-2003. This study estimates that the CPI for dairy products overstates food price changes by 0.5 to 2.5 percentage points per year for dairy, eggs, and butter/margarine.

Impacts of Trade Liberalization on the U.S. Dairy Market (Contractor and Cooperator Report No. 21, August 2006) reviews the economic effects of trade liberalization in world dairy markets by examining effects on farm milk prices and production, producer and consumer surpluses, and government revenues and program expenditures. The empirical analysis suggests that multilateral trade liberalization leads to generally modest price and production impacts on U.S. milk producers.

Dairy Backgrounder (LDPM-145-01, July 2006) reports that shifts over time in consumer demands, the location and structure of milk production, industry concentration, international markets, and trade agreements have dramatically altered the U.S. dairy industry and changed the context for dairy policies and the sector as a whole. In the future, the U.S. dairy industry is likely to become more fully integrated with international markets.

Trade Liberalization in International Dairy Markets: Estimated Impacts (ERR-16, February 2006) examines issues related to modeling complex policy regimes that affect international dairy markets. Average bound tariffs for dairy remain among the highest of all agricultural commodities, and dairy trade is characterized by a large number of megatariffs and tariff-rate quotas (TRQs). Modeling results indicate that liberalization would reduce world dairy product supplies and increase the value of dairy trade.

Dairy Policies in Japan (LDP-M-134-01, August 2005) provides a detailed description and analysis of Japan's policies that support its milk producers and regulate dairy markets. If Japan's policies were liberalized, prices and production in Japan would fall, but sizable milk production would remain.

Economic Effects of U.S. Dairy Policy and Alternative Approaches to Milk Pricing (Report to Congress, July 2004). (This file is 1.5 MB in size and may take time to download.) This report shows that the effects of dairy programs on markets are modest and that current dairy programs are limited in their ability to change the long-term economic viability of dairy farms. Other forces such as technology, changing consumer demand, and changes in the marketing and processing sectors, while difficult to measure, are likely to have more impact.

Characteristics and Production Costs of U.S. Dairy Operations (SB-974-6, February 25, 2004). Total costs of producing milk in 2000 ranged from an average of $11.58 per hundredweight (cwt) of milk sold in the Fruitful Rim-West region to $18.23 per cwt in the Eastern Uplands. Milk producers in the West had a significant cost advantage over producers in other regions in 2000 because their operations were much larger. Operations with 500 or more milk cows had significantly lower total operating and ownership costs, indicative of the economies of size experienced by larger operations. Also, differences in animal performance, feed efficiency, and labor efficiency were critical in determining whether producers were in the low- or high-cost group for producing milk. These findings were based on the 2000 Agricultural Resource Management Survey (ARMS), the most recent national survey of milk producers.

Manure Management for Water Quality (AER-824, June 2003) evaluates the costs of spreading manure on cropland at the farm, regional, and national levels. EPA regulations enacted in February 2003 require concentrated animal feeding operations (generally the largest producers of hogs, chicken, dairy, and beef cattle) to meet nutrient application standards when spreading their manure on cropland in order to preserve water resources from nitrogen and phosphorus runoff. USDA is encouraging all animal feeding operations to do the same. If all operations meet the new standards, increases in production costs could be felt throughout the food and agricultural system.

The Changing Landscape of U.S. Milk Production (SB-978, June 2002) illustrates how milk production has changed in the United States since 1975. Questions of how much milk is produced, where it is produced, and by whom are important both nationally and regionally. Dairy farms continue to grow, become more specialized, and, in some regions, more concentrated. But small traditional dairy farms also remain part of the industry.

Milk Pricing in the United States (AIB-761, February 2001) provides a primer on the U.S. milk market, cutting through the complexities to describe key pricing mechanisms and to provide a basis for more detailed study. Farm milk prices in the United States are determined by public and private pricing institutions whose interactions have become complex.

Other Government Agencies

U.S. Department of Commerce, Census Bureau. Census data on population is used for computations of per capita dairy product consumption. The Economic Census provides information on dairy product firms by product used. The Census Bureau is the provider of official U.S. trade statistics.